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Today's Market View Including Ariana Resources, Afferro Mining, Amara Mining, DiamondCorp and others

Published: 22:06 07 Jan 2013 AEDT

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Morning View

Expect industrial metals to outperform precious as Chinese currency rises alongside US dollar

US economic recovery and Fed minutes suggesting an end to the US bond purchase program is drawing money back into the US dollar

Eurozone may have also seen the worst of its economic crisis according to recent news.

US dollar strength naturally pulls metals lower in trading against other currencies

Gold and sliver are likely to suffer most from US dollar strength un dollar terms but gold may see ongoing support from central bank buying

ETF activity is critical to this market with a slowdown in ETF purchases seen and potential for ETF sales to pull back gold prices

New physical ETF (ETP) investment vehicles in Copper should support price levels.

Industrial metals should outperform precious metals as demand from traders and industry restocks inventory chains. We expect this to offset much of the US dollar strength.

China’s Renminbi is pegged in a tight trading range to the US dollar implying that a stronger US dollar also lifts the Renminbi to give Chinese traders better purchasing power. 

The impact of a stronger Renminbi should be to lift key industrial commodities as China is the major consumer of these base metals and bulk commodities

A stronger US dollar and Renminbi could also have the unintended benefit of improving the competitive nature of non-US and Chinese exporters

The London Bullion Market association poll suggests that investor focus is switching towards metals which are industrially used

Note: investors and data often forecast a better year ahead in H1 to be dashed in H2 when reality sets in.  

Momentum traders can do well to go with the flow, while contrarians might look to sell the rally and wait for worse economic data later this year.

Commodity index reweighting to impact metals prices

Metals prices are generally pushed and pulled by differing factors in the first few weeks of the year as index funds rebalance their portfolios.

Traders expect the reweighting to help gold and silver but to worsen prices for aluminium and zinc but to have little impact on copper and nickel. 

The two key indexes the Dow Jones (UBS DJ-UBSCI) and the S&P Goldman Sachs (GSCI) will rebalance from tomorrow through to the 14th

Index rebalancing is led by price changes, by liquidity, by the global importance of each metal and 

Normally the index rebalancing can have a marked, though short term, impact on prices, but this year new US dollar strength appears to be determining the direction of most traded metals.

Banks obtained an approval from central bank chiefs to include more types of assets to qualify for the liquidity targets and have four more years to comply with new regulation.

It was suggested a planned full implementation of measures in 2015 might challenge lending and economic recovery.

The liquidity coverage ratio (LCR) is engineered to force banks to hold enough liquid assets to manage through 30-day credit squeeze.

The rule was meant to take effect on Jan 1 2015.

Banks will now have to meet 60% of the LCR obligations by 2015.

Mining Witter – not to be confused with Whittle or Twitter

More wittering from the mining industry for our new Witter, not Twitter technology idea. 

Miners Witter – miners love to complain about production mets fiddling the production balance and lowering the head grade.

Metallurgist Witter – metallurgists whinge about mine grade control resulting in a plant feed grade of anything between 0-100%, with tonnages to match.

Mineralogists Witter – why do metallurgists wait until the final moment, when there is an emergency and no more budget left, to submit a sample for mineralogy. .

Geologists Witter – complaints about everyone in the mining chain for being unable to dig up what the geologist said was there in the first place

Broker Witter – an outlet for brokers in relation to companies which do not follow the good advice given by brokers for their own good!

Bureaucracy Witter – so we can all moan about the amount of meaningless paperwork that gets in the way of actually doing something productive..

We feel that our new witter idea could sweep away the benefits of trade union co-operation and lay bare all the moans and wittering of workers and their management.

Economic View

US – Non farm payroll advanced to 155k in Dec, beating estimates for a 152k increase. Nov numbers were revised upwards to 161k from 146k.

Unemployment rate remained at 7.8%, in line with a revised upwards number in Nov. Estimates were for 7.7%.

In addition, wages grew faster-than -expected and people worked longer hours suggesting households may by earning enough to sustain spending.

Average hourly earnings climbed to US$23.7 in Dec and the work week increased by six minutes to 34.5 hours.

In 2012, the economy added 1.84m jobs, matching an increase in 2011. It is the best back-to-back reading since 2005-06.

Jobless rate was 8.1% in 2012, the lowest in four years.

Services PMI grew to 56.1 in Dec, up from 54.7 in Nov and 54.1 forecast. A shopping season and improving construction market drove service industry to expand at the fastest rate in 10 months.

Japan - Auto sales fell 3.4%yoy in Dec, the fourth consecutive down month, following the expiration of the state’s buying incentives for fuel-efficient cars.

Full year sales went up 26% to 3.39m, the first gain in two years, on state subsidies and a recovery after the earthquake and tsunami.

Local media said the government will announce US$136bn worth of fiscal stimulus directed to public works projects to revive economic growth. 75% of the sum will have to be debt financed.

UK - House prices gained 1.3%mom to £163,845 in Dec. (Lloyds Banking group)

Prices are expected to stabilise at current levels through 2013, Lloyds said.

Zambia - Zesco, state owned power company, has asked mining firms to reduce power use to help cope with a power shortage.

Demand is estimated to exceed generation capacity of 1,746MW by around 70MW.

Miners were asked to cut electricity consumption by 100MW.

Power deficit is expected to ease by the end of 2013 when 180MW of additional capacity will installed.

US$1.3027/eur vs 1.3022/eur last week. Yen 87.76/$ vs 88.23/$. SAr 8.604/$ vs 8.626/$. $1.604/gbp vs 1.606/gbp

Commodity News

Precious:

Gold US$1,655/oz vs US$1,642/oz last week - Gold is little changed this morning with price gains limited by the strong US dollar.

Turkish gold exports jumped nearly 800% to US$12.7bn in the first eleven months of 2012 compared with US$1.47bn exported in the whole year of 2011. (Economy Ministry)

Nearly half of the exports went to Iran despite US sanctions on Tehran. Another US$4.2bn worth of gold went to the UAE.

“Gold-for-Gas”: Turkey is the largest buyer of Iranian natural gas (90% of exports) and pays for it in Turkish lira that are then ideal for buying gold. Paying Tehran in Dollars or euros is sanctioned by Western countries.

Harmony Gold is in talks with miners at its largest mine Kusasalethu, South Africa, amid an illegal strike that led to the suspension of operations last month.

“Should the current poor performance continue, then the situation at Kusasalethu is dire for the rest of the 2013 financial year and into the future,” the company said.

Harmony fired 578 workers after they supported an unauthorized protest on Dec 15. Afterwards, 1,700 miners remained underground expressing their discontent with the suspension of fellow workers.

The closure of the mine has translated in Kusasalethu producing only 22% of its gold production in Dec quarter.

SPDR gold trust holdings increased to 1,342t (43.149moz) worth US$71.078bn from 1,340t (43.091moz) last week. 

Platinum US$1,558/oz vs US$1,551/oz last week

Palladium US$685/oz vs US$687/oz last week

Silver US$30.16/oz vs US$29.48/oz last week

Base metals:

Copper US$ 8,054/t vs US$8,087/t last week - Copper prices are range bound as good US employment data were balanced by concerns the Fed might withdraw its stimulus this year.

Copper and copper alloy fabricated products may grow 4% in 2013, gaining for the first time in three years on the new government’s plans to revive growth.

Total production may reach 800,000t this year, up from 770,000 recorded in 2012, the lowest level since 2009.

Aluminium US$ 2,042/t vs US$2,101/t last week

Nickel US$ 17,329/t vs US$17,315/t last week

Zinc US$ 2,028/t vs US$2,066/t last week

Lead US$ 2,319/t vs US$2,355/t last week

Tin US$ 23,750/t vs US$23,996/t last week

Energy:

Oil US$110.9/bbl vs US$111.7/bbl yesterday

Natural Gas US$3.320/mmbtu vs US$3.208/mmbtu yesterday

Uranium US$43.00lb (close at 04/01/13) unch on previous close

Other:

Steel - Chinese steel futures increased to the highest in more than six months today on positive economic news from the world’s second largest economy and cost of raw materials such as iron ore jumped to levels last seen in Oct 2011.

Traders in Shanghai said customers are desperate to find new cheaper sources of iron ore that were not considered in the past. Shipments from Malaysia, Indonesia and some South African countries like Mexico and Chile are considered.

Company News

Anglo American (LON:AAL) – Potential Replacement of Cythia Carrol

News reports are suggesting that Mark Cutifani, head of AngloGold Ashanti may be a potential replacement for Cynthia Carrol.

Cutifani is said to be straight talking and a defender of South Africa as an investment destination.

He does have the broad experience across other commodities in Anglo’s portfolio.

Cutifani has run AngloGold since 2007 and was previously at Inco.

Coal of Africa (LON:CZA) – MOU with Vitol Group

The company has signed an MOU with Vitol Group for marketing rights over all export thermal and coking coal for 8 years.

For the Makhado product the marketing period will be over a period of 5 years.

The MOU excludes coal under current arrangements with the company’s strategic partners.

The company has also come to an agreement with Grindrod with Coal of Africa on the Phase 4 expansion at the TCM export terminal in Maputo.

The company has retained its option to take up capacity in the expansion without any obligation to fund its share.

Conclusion: This arrangement will be seen as a positive against the slew of bad news – we believe operational challenges remain.

Diamondcorp (LON:DCP) – Confirmation of Funding from Tiffany Completes Funding for Lace Mine

The company has announced that the $6m loan from Tiffany has been finalised.

This is the last part of the funding package and triggers the release of the proceeds of the convertible bond issue which totals £4.2m.

The total proceeds from the bond and the Tiffany loan raises R 113m and will satisfy the draw down conditions for the R 220m from the IDC.

The IDC loan required a total funding of R 320m to be in place for the Lace Mine development which included a 33% contingency.

The $6m Tiffany loan carries an interest rate of 9% rolled up for three years and to be fully repaid on the 8th anniversary of 10th April 2013.

Conclusion: All the funding is now in place to develop the Lace Mine with a good cushion built in – R 333m against a peak funding requirement of R 286m two years into development. The mine is expected to generate revenues 15 months into development from development ore of 600,000 tons. The mine once developed will have a mine life of 26 years and is expected to produce 380,000 carats in earlier years averaging 260,000 carats during the life of the mine. Based on a valuation of $160/carat the mine should generate revenues of US$46/t net of royalties and marketing costs against operating costs of $14.6/t. The low costs are based on the block caving mining method being proposed. 

The company is well positioned to start the work on the mine – they are likely to start work on the mine next week by blasting a vent to enable the start of the multi-blast work – this will take around a month. They will then mobilise contractors to do the box cutting – full scale underground development work will start around the 1st April. In the meanwhile the work to make modifications to the process plant which has been on going will be completed enabling the company to re-start processing of  tailings sometime in March. By the end of April they should be processing around 100,000 tons of tailings which will give them 5-6,000 carats/month. This will add to the existing package and used as a sample for the Lace Mine and the company can decide when to realise funds from the package.

While development risks remain, there is considerable upside in the shares. There is significant value in the Lace diamond mine and the project – we estimate an NPV of £59m using a discount rate of 12% for a 26 year mine life with a US$160/carat value and operating costs of US$14.8/t. The recent move up is a relief rally and the shares should continue to perform as the mine goes into development.

Ferrex Plc (LON:FRX) – Scoping Study at Malelane Iron Ore Project

The scoping study on the Malelane Iron Ore project shows a significant improvement on the pre-tax NPV at a 10% discount rate by 65% to US$523m.

The improvement is through a combination of an improvement in capital intensity which has fallen to US$72/t to an improvement in average FOB operating costs to US$53.5/t.

Capital costs remain the same at US$139m but a new processing circuit improves throughput with higher production and improved yields bringing down the capital intensity.

Operating cost improvements are based on projected on rail haulage costs coming down to US$0.05/tkm against a previous estimate of US$0.10/tkm.

Operating costs start at $44/t at the start of the project and rise through the LOM of 15 years to 66/t as stripping costs rise.

The project has a maiden JORC resource of 139 Mt at 37% Fe which has been calculated over 1.1km of a 14 km strike.

Price projections used in the project are US$134/t.

Conclusion: The scoping study shows improvement in project economics, however, there is still work to be done – the pricing assumption for the project is too high and we would expect to see a 12% discount rate being used and a post tax NPV number. Operating costs have improved but are still at the upper end of costs for an African project. The current resource is small but should the size of this increase and further improvements achieved the project could become interesting as the product has potential transport links to get to market.

Metminco (ASX:MNC) – Optimisation at Los Calatos to help economics 

Metminco has run a further optimisation of the Los Caltos open pit to improve potential economic returns.

The new open pit resource of 274mt includes a 21mt inferred resource grading 0.42% copper equivalent to 500m below surface.

The underground mine resource of 302mt at 0.61% CuEq is better but sounds challenging from an underground mining cost perspective even for Chile where low cost bulk mining is a speciality.

There are mines in the world which work at these grades but they generally started with higher grade open pits or much higher underground mining and benefit from low blasting costs or other benefits.

Metminco is also evaluating options for its Mollacas and Vallechio projects in Chile.  

Mollacas project which has a mineral resource estimate of 34.3 Mt containing 131,749 t of copper and 176,408 oz of gold. 

We are waiting for an internal scoping study on the Vallechio project which has a mineral resource estimate of 8.86mt with 227koz gold, 2,83moz silver along with some zinc, lead and copper.

Conclusion: The concept of working up a smaller and more economic open pit to get the mine started is good but we feel unconvinced that the grades as presented will offer sufficient economic return on ‘bankable’ copper price assumptions.  Perhaps Metminco could have included some of the economic figures with this announcement to aid our understanding of this project? 

Mining last week:

Shale Gas companies continue to show strong gains

AJ Lucas (ASX:AJL) - which holds 42% of Cuadrilla along with 25% stakes in of two of Cuadrilla’s shale gas projects continues to post gains in the Australian market on the back of permits to resume fracking in the UK.

IGas (LON:IGAS), mkt £121m shares have pulled back to 120p having risen from 70p/s in late December on UK government permission to allow fracking of shale gas in the UK

Dart Energy (ASX:DTE) - we learn are producing power for 500 homes from coal bed methane (CBM) at its facilities in the Forth Valley in Scotland.  

Amara Mining (LON:AMA) – Technical Report on Baomahun Filed

Anglo American (LON:AAL) – Sale of 70% Amapa stake 

Condor Gold (LON:CNR) – New soil anomalies at La India (Nicaragua)

Ariana Resources* (LON:AAU) – Proccea Construction Co. and directors buy new shares issued through Yorkville SEDA facility

Bellzone Mining (LON:BZM) – First Shipment in iron ore

Centamin (LON:CEY) – Egypt blocks Centamin 400 kg gold shipment 

Arcelor Mittal (NYSE:MT) – Sale of 15% in Labrador Trough Iron Assets

Afferro Mining (LON:AFF) – Approach from IMIC

 

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